The surge in mortgage lending to its highest level since before the financial crisis has come despite banks curbing riskier loans. If we are right to think that house prices will dip, that should limit the number of borrowers falling into negative equity next year.
Surge in mortgage advances comes despite reduction in riskier lending
- The surge in mortgage lending to its highest level since before the financial crisis has come despite banks curbing riskier loans. If we are right to think that house prices will dip, that should limit the number of borrowers falling into negative equity next year.
- The Mortgage Lenders and Administrators Statistics for Q3 released by the Bank of England this morning confirm that mortgage lending has rebounded emphatically from its Q2 collapse. (See here.) The value of new mortgage commitments (lending agreed to be advanced in the coming months) was up 6.9% y/y to its highest level since 2007 Q3.
- The boom in mortgage lending has gone ahead despite banks reducing high LTV lending. According to Moneyfacts, the number of 90%+ LTV mortgage products available dropped from 1170 in March to just 76 in Q3. Looking through Q2 when volumes of mortgage lending were low, the Bank of England data showed that this translated into the proportion of regulated lending (i.e. excluding most buy-to-let advances) at an LTV of over 90% dropping from 6.1% in Q1 to 4.0% in Q3. (See Chart 1.)
- We previously suspected that this reduction of high LTV lending would limit mortgage availability to first time buyers and start to weigh on housing market activity. But there was little sign of this in Q3. The share of regulated mortgages issued to first time buyers only fell from 42.1% in Q1 to 40.9% in Q3. Mortgages to former owner occupiers increased by a corresponding amount.
- At the same time, the share of lending in the 75% to 90% LTV category has risen. Admittedly, this probably partly reflected lower remortgaging activity at lower LTVs. But in any case, it seems most first-time buyers have been able to cope with the enhanced deposit requirements. Perhaps that is unsurprising given forced saving during lockdowns and the stamp duty cut.
- Due to the fall in high LTV lending, and despite a jump in quoted interest rates, the average rate on advances dropped from 2.1% in Q1 to 1.9% in Q3. Banks’ margins probably rose despite this, with 26% of advances at rates of more than 2ppts above bank rate, up from 15% before Bank Rate was last cut, to 0.10%.
- The fact first time buyers are still able to access mortgage credit suggests housing market activity will stay very high in the near term. But we suspect that lending, transactions, and prices will slump in the second half of 2021. (See here.) At least with very high LTV lending curbed, that shouldn’t lead to a negative equity crisis.
Chart 1: Proportion of Regulated Mortgage Lending at High LTVs
Source: Bank of England
Andrew Wishart, Property Economist, +44 (0)7427 682411, firstname.lastname@example.org